To date, the stock has been driven by the San Diego firm's strong growth. From $1.95 a share in 2010, profits hit $2.37 a share last year and are expected to rise 30% to $3.11 in 2012. Banks' and other lenders' eagerness to unload delinquent or defaulted credit-card, mortgage and other debts should assure another solid year for Encore. It is forecast to earn $3.69 a share in 2013 on revenue of $630 million, up 19% and 13%, respectively, from this year.

Encore, a successor to MCM Capital, is one of the two biggest debt-collection agencies in the U.S. and the fragmented industry's most efficient operator. It has built an integrated Indian unit over the past seven years that handles a substantial chunk of its business at low cost. Almost half the money Encore collects is brought in by the New Delhi-based group, which serves as call center, back office and database manager. Mike Grondahl, an analyst at Piper Jaffray, estimates the Indian operation costs six cents for every collection dollar Encore retrieves, versus 40 cents on the dollar for a comparable U.S.-based effort. He has a $37 price target on the stock.

"On a global basis we're seven years ahead of the competition," says CEO Brandon Black. "We aim to maximize [the Indian unit's] contribution to the whole rather than viewing it as a cost-center."

Recent Price

$27.69

YTD Change

30%

Market Value (mil)

$687

Revenue 2012E (mil)

$558

EPS 2012E

$3.11

EPS 2013E

$3.69

P/E 2012E

8.9

P/E 2013E

7.5

E=Estimate. Source: Thomson Reuters

It's not just about lower-wage staff but a better database, which includes information on one in nine U.S. consumers. That has allowed it to fine-tune its search for repayment. "In a recent $100 million portfolio we purchased, we're finding that we have previous relationships with almost half the debtors. Better knowledge leads to better solutions and ultimately more recovery," says Black. Encore's recovery rate on 2008-vintage defaulted credit-card debt is more than two times every invested dollar, versus rivals' roughly 1.7.

Efficiency will become even more vital as the U.S.' fledgling Consumer Financial Protection Bureau gets going. Regulatory costs for debt collectors are expected to grow substantially in the next year as the CFPB and the Federal Trade Commission try to clean up shoddy industry practices. That creates a chance for Encore and its key rival
Portfolio Recovery Associates
(PRAA) to buy other firms.

"We don't believe that the smaller players will be able to keep up," says Black. "That means the most efficient players -- like us -- will be able to grow by merger."

To be sure, Encore has had run-ins with the law. Without admitting liability, it paid $580,000 last year to settle claims by the state of Texas that it used inaccurate affidavits to validate some debt, and it faces class-action suits in California and Illinois over allegations of improperly contacting people via cellphone. The litigation hurt the stock. Black insists Encore has addressed these issues.

If so, Encore shares are a good value. Using forward earnings estimates, the stock trades at a multiple below eight, against 12 for Portfolio Recovery. Its price-to-sales ratio is 1.4, versus its rival's 3.3. Piper Jaffray's Grondahl expects Encore's earnings to grow 15%-20% a year through 2015. At that rate, shareholders will get their money back -- and then some.